• Celebrating Economic Independence

    Jul 4 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Financial Markets, Government, Macroeconomic Measurement • 574 Views

    Alexander Hamilton must have been worried. In 1790, as Secretary of the Treasury, a troubled economy had become his responsibility. He had a huge federal debt to fund, a banking sector that was distressed, and manufacturing to stimulate.

    Sound familiar?

    Hamilton submitted a 3-part report to the Congress for their approval. Focusing on public credit, creating a national bank, and encouraging manufactures, he had a plan for economic independence.

    Public credit was crucial. Created by the Revolutionary War, the debt was primarily owed abroad. He had to reassure our European creditors that they would get all of the money that was due them. By funding the war debt, he would establish our good credit, a requisite, he believed for sound finance.

    Hamilton understood that economic independence actually related to being dependable within a network of interdependence. The Congress and President Washington followed his lead, implemented his ideas, and the rest is history. The U.S. has never defaulted on a loan.

    On this July 4, as we celebrate political and economic independence, let’s applaud Alexander Hamilton, the father of our economy.

    The Economic Lesson

    Sovereign debt is created when a nation sells bonds. Because banks typically purchase these bonds (governments, households and businesses buy them also), the health of the banking sector can be tied to the bonds that banks own.

     

    An Economic Question: Keeping in mind Greece’s long history of defaulting on its sovereign debt, why would German and French banks want a Greek bailout?  

     

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  • The Sugary Beverage Debate

    Coke and Pepsi

    Jul 3 • Businesses, Demand, Supply, and Markets, Regulation • 2337 Views

    Pepsi has discovered that “fun for you” (chips and soda) increases revenue more than “good for you” (oatmeal, fruit juice, Gatorade). According to the WSJ, with Pepsi losing market share to Coke, they will focus more advertising dollars on “fun for you.” During 2010, Coke’s soda advertising cost close to $253 million while Pepsi spent almost $154 million.

    The WSJ tells us that Pepsi’s CEO, Indra Nooyi cares about “good for you” and believes the consumer wants healthier products. Add to this soda taxes in most states that are supposed to encourage us to eat healthier foods. Or, new federal calorie labeling requisites. Or soaring obesity and diabetes numbers. Bloomberg Radio recently reported that big-and-tall men’s sizes are now being emphasized more by clothing retailers.  What to do?

    Coke has 42% of the beverage market, Pepsi, 29.3%, and Dr. Pepper Snapple, 16.7%.

    The Economic Lesson

    Duopoly. When 2 large firms dominate a market with close to 80% of all sales, we can call them a duopoly. One economist has suggested that when deciding whether a duopoly is harmful to consumers and rivals, we should consider innovation, prices and profits.

    Some current and past duopolies:

    • Fedex and UPS
    • Coke and Pepsi
    • Home Depot and Lowes
    • Kodak and Fuji Film
    • Gillette and Wilkinson Sword

    An Economic Question: As a duopoly, do Coke and Pepsi have too much power? Explain.

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    “Made in the USA”

    Jul 2 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement • 856 Views

    According to USA Today, “The two ‘most American’ cars are Japanese.”

    Cars.com has an American-Made Index. Ranking vehicles by sales, where they are made, and the origin of their parts, they concluded that the Toyota Camry is the most American car you can buy while #2 is the Honda Accord. Each is composed of 80% American parts, and with plants in Kentucky and Indiana (Camry), and Ohio and Alabama (Accord), they create jobs for many Americans because their sales are substantial.

    By contrast, it is likely that the full size Ford pick-up you drive was assembled here but primarily has foreign parts.  And your Chrysler minivan, Chevy Camaro, and Ford Fusion were assembled in Canada or Mexico.

    Where am I going? To the Bay Bridge. Connecting San Francisco and Oakland, the bridge was described as a structure that would be “made-in-China.” But, according to the web site of one of its primary contractors, a U.S. based construction firm, while the steel is sourced in China, the new bridge actually has Asian, European, U.S. origins. Still, many of the reader comments after the article expressed disapproval of the Chinese connection. To save jobs, they sought a “made-in-the-USA” bridge.

    At the end of a 2002 report from the Dallas Federal Reserve Bank called “The Fruits of Free Trade,” is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition.

    The Economic Lesson

    David Ricardo (1772-1823) stated the classic defense of free trade when he expressed the principle of comparative advantage. Trade, trade, trade, he said because each nation then can do what it does best (where it has the comparative advantage) and the whole world benefits through greater efficiency.

    An Economic Question: What are the costs and benefits of NAFTA, the free trade agreement the U.S. has with Canada and Mexico?

     

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    A QE2 Eulogy

    Jul 1 • Businesses, Labor, Money and Monetary Policy, Thinking Economically • 769 Views

    Although QE2 ended yesterday, eulogies for the Fed’s $600 billion bond buying program did not focus on the qualities of the deceased and why we will miss her. Yes, some did believe that things would have been much worse without QE2. But others were saying it was unnecessary and will fuel inflation.   

    Described in this Marketplace Whiteboard video, quantitative easing was about flooding banks with money by exchanging the securities they owned with deposits and reserves from the Fed. More money should mean lower interest rates which can encourage businesses to borrow.

    Logical. But it did not work out that way. Between November, 2010 and June, 2011, when QE2 was “alive,” we had the low interest rates. Still though, lending lagged, unemployment remained high, and growth, sluggish. 

    The Economic Lesson

    Can government make a difference? Adam Smith (1723-1790) said leave the economy alone. John Maynard Keynes (1883-1946) said prime the pump. Sadly, the economy can never provide a controlled experiment for deciding who is right.

    Even now, economists dispute the causes of the Great Depression. Was the problem insufficient government spending or inadequate monetary policy? Did the depression end because of WWII or would pent up demand have blossomed with or without a war?

    An Economic Question: Even when banks are flooded with money through quantitative easing, why might they be unwilling to lend and businesses uninterested in borrowing?

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    Are the Rich Getting Richer?

    Jun 30 • Government, Households, Labor, Macroeconomic Measurement • 532 Views

    Their conclusion was clear. A recent Federal Reserve study tells us that the rich are getting richer. A closer look, though, reveals it is a lot more complicated.

    We need to be aware of two issues.

    1. How should we define income and wealth? Calculating income, certain variables are obvious such as wages. However, should we include workplace benefits? “Psychic income” from the environment is even a possibility. You might think “psychic income” is ridiculous but think for a moment about Manhattan and Missoula. If the cost of living is much higher in Manhattan than Missoula, should we add the “psychic income” of the pleasures of Manhattan to offset its added expense? Similarly, assessing wealth involves decisions about what to include. On page 32 of the Federal Reserve study, you can see the variables they selected. 
    2. Are the same people becoming more affluent or have others replaced them? A recent report from the Treasury tells us that the “rich” consistently change. As average net worth grows, different people move into the top “slots.”

    Our point? Basing tax policy on income distribution statistics returns us to the mathematician, Benoit Mandelbrot. The closer we look, the more we see.

    The Economic Lesson

    Using Lorenz Curves, we can divide family incomes into quintiles and see the proportion of total national income possessed by each group. The answer, though, is only a starting point when we try to grasp income distribution.

    An Economic Question: Knowing that income distribution is a complex subject, still, we can decide whether our bias is toward equality or efficiency. As a voter, would you prefer the equality that results from more redistribution through higher taxes or less redistribution that encourages competitive behavior and growth.

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